STOCKTON, CALPERS AND ‘FAIR’ BANKRUPTCY

The Monday decision of a Sacramento-based federal bankruptcy court judge to allow the city of Stockton to proceed with its Chapter 9 bankruptcy filing was depicted in some circles as a victory for California’s pension status quo. Judge Christopher M. Klein ruled against several Wall Street firms that either owned or insured Stockton’s bonds and now face $165 million in losses if the city’s bankruptcy proceeds as city officials hope. The firms had argued that the California Public Employees’ Retirement System – which is owed about $900 million by Stockton and is by far the city’s largest creditor – should also be forced to accept losses in the bankruptcy process. They also asserted that Stockton’s claims of insolvency were belied by its spending practices.

But Klein’s decision offered more nuance than many initial reports suggested, and his comments from the bench made plain that he felt Wall Street creditors had a case. The judge said that while his Monday ruling did not deal with the fairness issue raised by bondholders, he would address the issue at the proper time, and that the city “is going to have a difficult time confirming a [bankruptcy reorganization plan] over the objection of unfair discrimination.” He described CalPERS as a “garden-variety creditor” – not one in a protected class.

This makes plain that Klein doesn’t buy Stockton’s and CalPERS’ theory that California laws, which hold promised pensions can’t be modified, do not trump federal bankruptcy laws, which allow bankrupt entities to tear up existing contracts and work out settlements with their creditors – all their creditors.

The judge’s comments also suggest he understands the absurdity of California cities using bankruptcy law to avoid paying their Wall Street creditors while fighting to maintain the unaffordable public employee benefits that led them to bankruptcy in the first place – as well as to protect CalPERS, which irresponsibly encouraged local governments to increase pensions without adequately funding them.

Klein’s comments give us hope that he will set clear, reasonable and fair precedents for future Chapter 9 proceedings involving local governments in California – and there are likely to be plenty of such proceedings.

In the meantime, we hope he is paying attention to recent news reports from around the state that are very much related to Stockton’s straits. Last month, CalPERS actuary Alan Milligan issued a report calling for state and local taxpayers to be forced to spend much more to shore up CalPERS’ unfunded liabilities, without additional contributions from public employees. But the Contra Costa Times reported that Milligan’s plan faced opposition from public employee unions, which fear that properly funding pensions will make pay increases less likely.

This is daffy, greedy, destructive, incoherent and a long list of other adjectives. It’s the mindset that got Stockton and so many union-dominated local governments into such a deep hole. We need federal bankruptcy courts to pummel this mindset, not protect it.